675: Porsche to Cut 5000 More Jobs After Sales Collapse. Here's What Their Strategy Is Missing

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0:48some scintillating news from Porsche over the last few days they've announced that they're going to be cutting 5 ,000 more jobs after they've seen a cratering of sales in China a brilliant article in the Wall Street Journal, just enough details to make you wonder what they're going to do to fix this problem. So the way Porsche has presented it is that the cuts come in, labor savings, and they can reinvest it. But the numbers are a bit scarier, right? So you've got 5 ,000 jobs agreeing to be cut now on top of the 3 ,900 that had been cut previously. Now, unless the rules of math have changed, that's 8 ,900 positions out of 42 ,000 employees.

1:40That's about a 21 point something percent reduction in your labor force. That's a massive culling to the labor force for Porsche. And the question becomes, is what they're doing and where they're going right for the business. So what we do when we analyze issues, investments and so on, we don't just analyze random companies. We either look at it from an investing perspective, or we look at it from helping clients we have in different companies, and they run these problems by us. We're going to show you now how we've analyzed the problem using our own internal system to see what's likely to happen at Porsche.

2:25Now, not to be outdone, their friends at BMW announced 8 ,000 job cuts for the same reason, because they've lost the Chinese market. Bottom line, they're not as competitive in China as they wanted to be, could have been, and it's a scary place to be. I was in Berlin recently, and I do not think the German government and the German industry and the leaders are taking the changes seriously enough. I'm very worried that Berlin and Germany will go through a kind of a Detroit curve and a Pittsburgh curve when they lost their automotive sectors and their steel sector. But that's for another discussion.

3:05Let's analyze this. So what I did is I simply took the headline, cut 5 ,000 more jobs after sales collapse in China, but I made one slight change. I said how to grow by cutting. You can see the C is capitalized, which means I did a copy and paste. I put that into Michael as the problem statement. Now, the way Michael works is that he is analyzing this for someone. So I created a composite of our most likely client profiles. Most of our clients are very senior people in either consulting, investing, or industry. So basically, I created a composite called Jim Jones. He's a consulting partner in manufacturing in the United States.

3:44And he is now running the study to see what's going to happen. So what basically happens is Michael produces two problem statements. One is the problem statement that we gave Michael. How to grow by cutting 5 ,000 more jobs after sales collapse in China. And Michael starts analyzing this, right? So basically, he's saying something important. You don't want to just cut costs. cutting costs is is good but it's not going to mean anything unless you can reallocate this to fix the erosion in the commercial capabilities which is basically a fancy word for saying sales so michael points out the problem but when you can fix it the metric targets units baselines against what we're measuring it there's a whole lot of analysis here i'm not going to go through everything but what michael does is very important is he he asks the question is this actually worth fixing.

4:34So it's called a materiality test. And Michael says, yes, this is worth fixing, provided you can compound this and generate sales in the United States and Middle East. That's very important. And then Michael says, your role in solving this. Now, this is very important because anyone doing the analysis has to take the analysis forward. In this case, the composite Jim Jones is going to do it. So Michael says, what you could lead, what you should not lead and where you need to bring in someone alongside you. And in this case, we created a partner profile called Jim Jones, and he's led not more than$5 million engagements in terms of sales.

5:11So quick flags on terms of things that this partner cannot do, should not do, and so on, and who they need to bring alongside them to make it work. Then, obviously, nobody works alone. So So in this case, Jim Jones can email someone. If I was driving the analysis, I'd probably email Chris, or Chris would email me saying, hey, this is something we found. Is it worth examining and so on? And here you can see we're pulling live data from the SEC. That means we're not reading news articles, we're pulling SEC data. Anything that is not updated in the SEC filings, we don't read it because we can't rely on unvetted media reports.

5:52That's the key thing. is all based on accurate data. And then one of the things I particularly like is we do a health and performance check at the end, which is, is what we're doing, or is what Porsche proposing going to increase the performance of the company at the expense of the health or vice versa? And then basically, what is the critical tension here? And once that's all done, using our proprietary system, we can develop a solution. I know it sounds very counterintuitive when I say this, that we can actually develop a solution from this. But if you've worked with us and seen our videos over the last few decades, you know the approach we use that generates a unique, testable, verifiable consulting study at the end.

6:36You've seen us do this before. We've just built the capability into Michael. So it's all been vetted in all our videos and so on, and you know the capability. Then we can generate a proposal from that. The key thing is, unlike most people that take an idea to a client, or if you work, for example, in a company, and you want to take an idea to your colleagues in the company, most people, they generate a very random genetic proposal. Here, Michael does the full analysis to our standards that you've seen on strategytraining.com, firmsconsulting.com, and the strategy control room, that standards, and then he generates a proposal, which is not genetic.

7:16That's the key thing. It's based on detailed analysis that matters. It doesn't do any more analysis than is needed. It all fits those very rigorous standards around hypotheses, hypotheses, testing, focus interviews, and so on. Benchmarks, case studies, all of it, the size of the price, all of those things you've seen us do. Now, what I want to do here is I will highlight some important things that were pointed out in the proposal. This proposal was generated from Michael with no changes. I've made no changes to this proposal. It's exactly what Michael has produced. I'm not going to go through the whole thing.

7:52It's a comprehensive proposal that you could either take to a company you work at for a change you want to make. If you're a consultant, you can take this to a potential client. You can make any changes you want if it suits you. Or if you're an investor, it helps you understand what needs to happen. There's a lot of material here. But the bottom line, and I think this is an important one, what Michael is saying is that cutting the headcount doesn't do enough because there's an entire infrastructure base that's been put in place to serve the Chinese market. That infrastructure base is not yet dragging returns down, but it's soon going to start dragging returns down, which is why if you look at the promise statement at the beginning, Michael gave a timeline by when the problem must be solved, because by that point, the infrastructure base that was built to serve China for a market that doesn't exist is going to start dragging on the earnings.

8:47The other thing Michael pointed out is that the way Porsche wants to make the transition is the electric vehicle strategy has not worked out very well for them, so we're going to go for a hybrid approach. But there's pending regulation on whether the hybrid approach will be approved. And if it's not approved, how do they bridge the transition from combustion vehicles to electric vehicles? That's an important one that's not pointed out anywhere in the Wall Street Journal article anywhere. Michael picks it up because he uses our approach and the way he thinks about things. So this is the KBA scrutiny.

9:24And then how Michael frames the problem. It's not about cutting 5 ,000 jobs because that's a symptom, not a problem statement. The way he points it out is that how much of Porsche's total capital base, not just headcount but everything, is structurally sized for a China volume level that will not return? And at what point does that fixed cost overhang begin compressing margins? The next question is even more important. Porsche needs to replace that lost volume, profits, and so on. And the US and the Middle East markets are the most likely ones to do that but can poor succeed in those markets and then the third one we've spoken about was the bridge so i'll go down i'm not going to read everything but he does point out that bmw mercedes did something similar in the past by reconstituting the types of sales they had in the united states and michael is going to use that as a case study but the one that i particularly liked.

10:21The one that I liked a lot is this one. Okay, so Michael phased the work, right? He's presenting a solution, but he's phasing the work in terms of how it should be done based on criticality and priorities. Phase one, phase two, but phase three is a very interesting one because what Michael is saying here is that obviously Porsche probably knows they have to grow in the United States and the Middle East, but there could be a problem whereby if you cut the 5 ,000 people before you develop a strategy for the United States and Middle East, and therefore the strategy would dictate what skills and capabilities you need, how do you know you're not going to cut knowledge from the 5 ,000 people that you need for the United States and the Middle East?

11:06Now, this is a very interesting problem that Michael is pointing out because corporate strategy, the way it's normally done in a kind of a turnaround, this is not a turnaround, by the way, posh, does have enough cash, but they're on a very, very bad downward slope. But typically, companies cut costs first, then they take time to develop their strategy. But if you cut your costs first before you develop your strategy, how do you know the costs you're cutting will not have assets and capabilities you need for the strategy you're yet to develop? So that's a very interesting thing. Now what I'm going to do is I'm going to go back into Michael here and show you something else he's put together, which is the probability of implementing.

11:44This is the question that Michael asked. Ignore the quality of the proposal. Question is, can Porsche's leadership team do this? It's a very simple question. The proposal could be good, could be bad. It's irrelevant. The question is, assuming the proposal is correct, but it has been checked out with standards, will Porsche's leadership team do this? There is a printed report that comes to this, but I'm going to go through the technical calculations a little bit. So it looks at things like, is the alignment amongst leadership? What's the CEO's track record? Who's been assigned to do it? What's the board's composition?

12:19The financial readiness, the conditions of the business. And Michael has said, all other things being equal, there's only a 10 % chance of this working. But then we say, okay, let's recalculate this by looking at recommendations we can make to the Porsche board and management to increase the odds of the proposal that we've put together working to solve this problem. So Michael gives a number of recommendations here and also your role in this implementation. Now, this is a critical thing about Michael. It's built for the person using the system. And Michael says, based on what we know about Jim Jones, a composite client we've created, based on actual clients, by the way.

13:01He explained that if you take this idea to Posh, this is the roles you can undertake and these are the roles you cannot take, which means if you work for a large firm, you can bring in colleagues to do this. Or if you're an independent contractor, you can bring in other people to put together a larger team and take on larger clients. Now, one of my favorite ones is scenario living. I love this one. scenario living as you can see is a very interesting tool the scenario planning and scenario living and scenario planning i'm not going to talk through the details it's all written up here it's basically a limitation that was created because humans cannot hold more than a few ideas in their mind and they can only analyze scenarios on two dimensions and four quadrants but what michael does he uses an actual quantum engine now this is very important most companies when they talk about using quantum tools, they talk about using a quantum simulation.

13:56They're not actually running it through a quantum engine. They're running it through a Monte Carlo simulation to simulate a quantum engine, but they're not doing a quantum calculation. As far as I know, nobody's using quantum for this. We've built that capability. And you can see here that we run it through IBM. We also have a system set up for users whereby they can actually verify that this was run through an actual quantum engine. In this case, it's IBM, but we have multiple quantum providers we work with. Just happens for this run, it's going to be IBM that's used. Now, the details are not important.

14:30What matters is that we've built a digital clone of Porsche. So Michael's built that. Well, you've been doing all these things. Michael's been building a digital clone of Porsche, which is trying to optimize the return invested capital spread, which is the amount of money you earn over the cost of capital, and then reinvesting that to grow. And then what Michael does, he instantiates that, means he puts the Porsche's digital clone into the future across, in this case, we've given it a hundred different, what would be a quadrant, but a hundred different scenarios in the future. And Michael also calculates what are the two most likely important variables, uncertainties for Porsche.

15:15If you run a different company through this, like BMW, you're going to get different uncertainties. You are going to get different tipping points and so on. And I'm not going to talk to the mechanics of what a tipping point and so on is, but if you understand quantum simulations and scenario planning and so on, you understand what that is. The bottom line is this, right? Michael is basically saying that assuming Porsche doesn't do something really crazy and actually acts and takes the decisions from the proposal remember Michael is now reading things from the proposal he's not saying well what would Porsche do he's saying what if Porsche took the proposal we generated what is the probability of implementing it the probability is low not because the proposal is bad but because it's found some problems in the way Porsche is set up.

16:01Then he's saying, okay, if we took this proposal and implemented it at Porsche, and we projected Porsche's future into 100 different scenarios at the same time, so you took this digital clone of Porsche and made it live in the future. It's basically saying there's a very high probability that this plan is going to work, and there's a kicker. It's saying that of 65 of the 100 scenarios and so on that's being run, 65 are going to create value and 19 are in serious difficulty conditions are deteriorating early action changes the outcome so again after the proposal is generating so before the proposal michael is reading what porsche said they're doing in the press once the proposal is generated it's now reading what michael is saying porsche should do then you have scenario living and you can also generated reports, send this to a colleague and so on.

16:58Then there's something very interesting we've done here. For the area you are analyzing, for the area you are analyzing, Michael now develops an AI strategy for you. So for example, if you are analyzing Porsche's supply chain in Mexico, if there is one, I don't know, then Michael will just confine his thinking to how would we redesign Porsche's supply chain in Mexico for an AI first error. And that's what Michael does here. I'm not going to go through the details, but I'm going to show you what's here. This is quite detailed. And again, all of this is calculated automatically from the proposal again.

17:38So it's taking the proposal and looking at it in different ways. So basically, it's saying that for this to work, Porsche will have to segment its market very differently. from what it's doing now, geographically and by income. And it believes that this is possible and it can happen. So it's looking at what the market needs, what the capabilities are and so on. It's detailed, it's very precise for Porsche. Nothing generic yet. Then we look at what drives value, right? Now you've seen us do this before, whereby we plot all of the clusters of activity that Porsche is doing for this problem, not for any problem, because this problem covers the whole of Porsche, looking at the United States and Middle East in particular, that's what it's focusing on.

18:24If the problem statement was narrower, it would focus on that narrow area. So it's not generic. Everything now is driven by the proposal. So it's saying, based on what we know about Porsche and what we know from our databases, which parts of Porsche are currently worse, equal, or better than competitors, and which ones are core, critical, and support. And then based on the changes that are needed from the proposal, it's telling you, or it's going to tell Porsche, how it needs to actually manage these capabilities differently. Some of them need to be better than competitors. Then it says, okay, how have things changed in this grid?

18:59Then it collapses this into a value center. The details don't matter now because we're going through the video, but based on where you are in each value center, there are different rules for the way you manage things. Then within each cluster, we look at the most important flows and we say which of these flows, flows mean work process, add the most value to Posh, and then we look at how you can use AI to change and redesign that flow. So you can go through all of this, different clusters, then it's taken each flow and it's ranked them by which ones add the most value to the business and which ones add the least value to the business.

19:43Then it works out what is your top workflow, prioritization, and it's talking about what could you do if you built this from scratch today for the AI era, and then how it should be rebuilt, what it looks like when it's redesigned, how it works, why it works, dependencies it relies on, what's the improvements going to be. You also have a chance to invite a colleague to review this. And then finally, the flows that cause the most value destruction. Michael also analyzes that, and the process continues. And Michael also makes the point that cost center and service center workflows are in the cost center, the service center, because they are built for labor intensive error, which would now, using old analysis, tell you that, hey, if it's labor intensive, maybe we should outsource it.

20:36But Michael is saying that if you rebuilt it for the AI first error, you could actually turn this into investment centers, whereby these workflows were cost centers when built for a labor intensive error. But if we rebuild them for an AI focused error first, we could make some of these value centers, right? There's always realism checks all the time that Michael is running to make sure things work. And of course, sometimes clients want us to rebuild these workflows for them, so we do that. Now I'm going to switch gears here. The red alert upsell we'll show you later, but let's switch gears here.

21:09One of the things we're going to look at is, we looked earlier whether this is good for, whether this is something Jim could do. Then we looked at the proposal, then we analyzed the probabilities, we looked at scenario planning, we looked at the AI and so on, but we never asked a question, which is, if Jim Jones could do this project, would it be good for his career? So that's what happens here. We are analyzing this based on whether it's good for Jim Jones, but we make one subtle change here. In this section, Jim Jones can actually add his resume here. Now, why do we have the resume adding part?

21:47Because the way people describe themselves when they set up, Michael, may be different from what their resume actually says. So up until this time, we've been using the description that Jim Jones has put of himself and Michael, which literally takes you two minutes to set up, maybe even less. But now it's going to ask you for your resume. You don't see it here because it already ran the analysis, but it asks for your resume, and then it compares your resume to the work. And it says, okay, you said this about yourself in the beginning, but your resume doesn't support this. For example, here, Jim Jones presented himself as a partner.

22:24But when Michael read his resume, Michael said, well, yeah, partner doesn't mean the same thing at different firms. Now, are you a partner in a lead firm? Are you a partner at a minor firm? Are you a partner at a boutique firm? Are you a partner in a one-person firm? Where does your skills level actually sit? So based on what Michael reads in the resume, It says, look, you're more of an executive assistant kind of capability to CEO, and you're not really partner principle level in your thinking, right? And it goes through all of the things that you need to consider. Like, was the proposal invited?

22:58If it's not invited, what's your standing to present it? What experience do you have that could help you? It goes through all of these things, yeah? The other thing we have is that if you're an executive coaching client, we can upload automatically your transcripts in here. And then Michael will take that into consideration to have additional information about your capabilities. Then the question we ask, is this project safe for your career? Michael goes through it. At the end of the day, he gives you a verdict, the bottom line. And that's the way it works. Now, when I run this, I put my resume in there and I put my details in there.

23:39When you run it, if you have access to this, you put in your details and your resume. So Michael is building something that takes into consideration your unique and actual capabilities. So the bottom line is Michael is saying that Porsche needs to really focus on reducing the cost space in China. it needs to reallocate the cost savings into the United States it needs to figure out how to be profitable in the United States but it must remember that the big problem it's facing is getting regulatory approval for the hybrid transition and it's giving this a 10 % probability of success not because the proposal is bad but it's looked at how Porsche is structured who's in charge what's their track record and so on and then finally it looks at things that can be done by Porsche to increase the odds of success, which is something if you're a consultant and an advisor, you could take to the board.

24:33It also then looks at scenario living. What are the odds of this strategy from the proposal being successful in the future? Risk and return, I will discuss that later. It then redesigns, it creates an AI strategy for the part of the business you are analyzing. And then finally, it looks at your career. Is this going to be good for your career? So very exciting. As you can see, the challenge is much more deeper than what the articles are talking about. And that's what Michael is there to show us. Things like us in a very deep way to help us understand what is really happening and what really needs to happen.

25:12So I wish Porsche the best, but I think it's going to be a rough ride for them.

25:22Thanks for listening to this episode of the Strategy Skills Podcast. Stay up to date on all of our latest training by signing up for our email updates on firmsconsulting.com. We look forward to helping you develop your strategy, critical thinking, decision-making, and communication skills next time here on the Strategy Skills Podcast.

25:55Thank you.